The so-called “FANG stocks” have been an incredibly-well performing group. For those who don’t know, FANG consists of Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) — formerly Google.
Why has this group been so successful? Despite a few of them sporting lofty valuations, they are the respective kings of their industries. Facebook dominates social media, Netflix owns streaming, Amazon is the king of e-commerce and Google owns the online search engine.
Over the past five years, Alphabet is the worst performing of the FANG stocks, returning “just” 180%. After that, it’s Facebook, which has generated 265%. Amazon’s 360% return stands out and Netflix’s 830% gain jumps off the page. Have these stocks gone too far, though?
I wouldn’t necessarily argue that. Some names warrant some extra caution in my view, however. Let’s take a further look to see which stocks are worth holding onto and which are worth taking profits in.
FANG Stocks: Facebook (FB)
We’ll keep the FANG stocks in order, so let’s begin with Facebook. Facebook has impressively captivated billions of users through its platform. At last check, Facebook catered to 1.23 billion daily active users, an 18% increase year-over-year. Monthly active users of 1.86 billion increased 17% year-over-year.
Even more impressively, Facebook has found a way to grow its revenue growth. That may seem like a typo, but it’s not. FB has managed to not only grow sales on a year-over-year basis, but also accelerate that rate of growth as well. After impressively growing sales in the 40% to 49% range through fiscal 2015, FB has now managed 50%+ revenue growth for five consecutive quarters. Obviously the company has found a way to continually grow and its users are not tiring of its various ad formats.
FB stock is not egregiously priced either; with a forward price-earnings ratio of just 21, Facebook shares are not that expensive with earnings per share expected to grow 28.1% this year and 23.4% next year.
Throw in the fact that Facebook has topped earnings expectations over the past 13 quarters and the stock becomes even more attractive. Shares have been on a tear this year. But a pullback to its 50-day moving average near $131 could be a buying opportunity.
FANG Stocks: Amazon (AMZN)
AMZN stock has also done well in 2017, up 14%. We all know about the decaying retail sector and Amazon’s ability to capitalize on that weakness. But judging the future of commerce can be difficult, especially with how quickly Amazon continues to move.
The biggest concern for Amazon skeptics has been earnings. Despite years of 20%-plus revenue growth, AMZN’s bottom line has hugged the flatline. Management argues that it’s investing in itself for even more growth and so far, investors have been patient. They’ve also been rewarded. Over the past 10 years, shares are up more than 2,000%. Thankfully, Amazon started to pad its bottom line with its Web Services cloud business.
While I personally love Amazon, I would be a bit leery of AMZN stock at these prices. Just last year we found out the hard way how fast things can change with sentiment. In the beginning of 2016, AMZN stock stumbled from $675 to sub-$500 in just five weeks. That 26% haircut startled plenty of investors, despite the stock rebounding to north of $800 a share within a year.
The lesson here is simple: Amazon shares are not invincible during pullbacks. Should we get a notable broader market correction, AMZN stock will not be spared. That is the best time to buy the stock. Now that it’s through the holiday season and continues to invest at a heavy pace, shares could struggle in the intermediate term.
A decline to its 200-day moving average would be a great place to initiate a long position. That mark is currently near $780 per share. Any further declines could be used to accumulate the stock.
FANG Stocks: Netflix (NFLX)
NFLX stock is one a lot of investors are kicking themselves over. Shares languished below $100 through most of 2016. At the time, some feared higher content costs and sloppy overseas execution.
Those fears still exist to some point, but Netflix has shown better execution as of late. As a result, shares have catapulted to north of $140. The stock has been consolidating nicely around this level. With the 50-day moving average just below, it appears Netflix may be setting up for a move to new all-time highs.
Investors who want to buy now could use the 50-day moving average — or a price just below — as their stop-loss. They could also wait for a possible decline to its 200-day moving average, currently just below $115, to buy. Longer-term investors may consider initiating a position in the name, with a plan to purchase more on additional declines.
The problem with NFLX stock is simple: valuation. Not many investors question the shift in video content consumption. The trend is in favor of Netflix, which holds a dominant position in the streaming world. I consider Netflix a very battleground-based stock. On the one hand, it’s trailing P/E ratio of 384 is near the top of its five-year range. On the other hand, its forward P/E ratio is the lowest it’s been in the same time frame.
The streaming offerings from Alphabet’s YouTube, as well as Hulu could also be a concern. For now, the bulls seem to be in control of NFLX stock. Should Netflix’s execution deteriorate or competition eat into its growth, the narrative may change. But for now, staying long Netflix seems like it will work.
FANG Stocks: Alphabet (GOOGL)
Like Facebook, one of the main attractions to Alphabet is actually the valuation. Trading at 21.8 times next year’s earnings, shares of Alphabet aren’t priced too expensive. Analysts expect GOOGL to churn out earnings growth of 17.5% next year, along with 19.3% annual earnings growth over the next five years.
Alphabet’s founders may have paved the way for internet domination. But there’s a new team member to its C-suite that has given GOOGL a much-needed boost. CFO Ruth Porat joined the company in May 2015.
In the year leading up to her hire, shares had been stagnant, returning just 5%. Since her addition, though, the stock is up a whopping 60%. Does it also seem like a coincidence that Alphabet missed analysts’ estimates on at least six straight quarters prior to her arrival? Since then, Alphabet has topped estimates in five of the past six quarters.
Admittedly, Alphabet’s transparency has been better, making it easier for analysts to form estimates. But this added clarity makes it easier on investors and helps lower volatility. For better or for worse, Alphabet takes some gambles. For instance, consider Alphabet’s self-driving car unit, Waymo. Porat has not stifled this growth. Rather, she has reigned in expenses and channeled GOOGL’s focus. As a result, the bottom line has improved, without future potential being eliminated.
With a consistent core business in Google and potential upsides in businesses like Waymo, GOOGL stock is attractive. With its dependable growth and a reasonable valuation, it’s even better. At just a hair under all-time highs, though, now may not be the best time to buy. A retest of its 50-day moving average near $840 and a further decline to its 200-day moving average near $800 would offer better entry opportunities.
As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.